oversight

California: Use of Funds and Data Quality for Selected American Recovery and Reinvestment Act Programs

Published by the Department of Education, Office of Inspector General on 2011-04-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

         U.S. Department of Education
         Office of the Inspector General


    American Recovery and
      Reinvestment Act
    California: Use of Funds and Data Quality for Selected
     American Recovery and Reinvestment Act Programs

                     Final Audit Report




ED-OIG/A09K0002                                  APRIL 2011
                                         UNITED STATES DEPARTMENT OF EDUCATION
                                               OFFICE OF INSPECTOR GENERAL
                                                                                                           AUDIT SERVICES
                                                                                                       SACRAMENTO REGION

                                                           April 28, 2011



Ken Alex
Director, Governor’s Office of Planning and Research
1400 Tenth Street
Sacramento, CA 95812

Tom Torlakson
State Superintendent of Public Instruction
California Department of Education
1430 N Street
Sacramento, CA 95814

Dear Director Alex and Superintendent Torlakson:

This final audit report presents the results of our audit to determine whether (1) selected local
educational agencies (LEAs) in California used Recovery Act funds in accordance with
applicable laws, regulations, and guidance; and (2) the California Department of Education and
selected LEAs reported data that were accurate, reliable, complete, and in accordance with
Recovery Act reporting requirements.

Statements that managerial practices need improvement, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General (OIG).
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

This report incorporates the comments you provided in response to our preliminary audit report.
If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Department of Education
officials, who will consider them before taking final Departmental action on this audit:

                                Ann Whalen
                                Deputy Director for Programs
                                Implementation and Support Unit
                                U.S. Department of Education
                                400 Maryland Avenue, S.W., Room 7W206
                                Washington, DC 20202



 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                      Thelma Meléndez de Santa Ana, Ph.D.
                      Assistant Secretary
                      Office of Elementary and Secondary Education
                      U.S. Department of Education
                      400 Maryland Avenue S.W., Room 3W315
                      Washington, DC 20202

                      Alexa E. Posny, Ph.D.
                      Assistant Secretary
                      Office of Special Education and Rehabilitative Services
                      U.S. Department of Education
                      550 12th Street S.W., Room 5107
                      Washington, DC 20202

It is the policy of the U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.


                                             Sincerely,

                                             /s/

                                             Raymond Hendren
                                             Regional Inspector General for Audit



Enclosure
       Abbreviations, Acronyms, and Short Forms
                  Used in this Report
___________________________________________________
ARRA                    American Recovery and Reinvestment Act of 2009

California Education    California Department of Education

Department              U.S. Department of Education

Fresno                  Fresno Unified School District

FTE                     Full-Time Equivalent

GAO                     U.S. Government Accountability Office

IDEA                    Individuals with Disabilities Education Act, Part B Grants to
                        States

LEA                     Local Educational Agency

OIG                     Office of Inspector General

OMB                     Office of Management and Budget

Planning and Research   California State Governor's Office of Planning and Research

Recovery Act            American Recovery and Reinvestment Act of 2009

San Diego               San Diego Unified School District

San Francisco           San Francisco Unified School District

SELPA                   Special Education Local Plan Area

SFSF                    State Fiscal Stabilization Fund

Title I                 Title I, Part A of the Elementary and Secondary Education Act
                        of 1965
Final Audit Report
ED-OIG/A09K0002                                                                       Page 1 of 27

         California: Use of Funds and Data Quality for Selected
          American Recovery and Reinvestment Act Programs
                              Control Number ED-OIG/A09K0002


                                            PURPOSE

The American Recovery and Reinvestment Act of 2009 (Recovery Act) places a heavy emphasis
on accountability and transparency and, in doing so, increases the responsibilities of the agencies
that are impacted by the Act. The U.S. Department of Education (Department) is ultimately
responsible for ensuring that education-related Recovery Act funds reach intended recipients and
achieve intended results. This report provides the results of our audit to determine whether
(1) selected local educational agencies (LEAs) in California used Recovery Act funds in
accordance with applicable laws, regulations, and guidance; and (2) the California Department of
Education (California Education) and selected LEAs reported data that were accurate, reliable,
complete, and in accordance with Recovery Act reporting requirements.

We reviewed three education-related grants funded under the Recovery Act: State Fiscal
Stabilization Fund (SFSF) Education Stabilization; Title I, Part A of the Elementary and
Secondary Education Act (Title I); and the Individuals with Disabilities Education Act, Part B
(IDEA). We reviewed selected costs charged to these grants during the period July 1, 2009, to
April 30, 2010, and data reported for the quarterly reporting period ending December 31, 2009.
Our review covered seven data elements that must be reported under Section 1512 of the
Recovery Act—estimated number of jobs created or retained, vendor information, project status,
and the amount of funds awarded, subawarded, received, and spent.


                                     RESULTS IN BRIEF

The three LEAs we reviewed generally used Recovery Act funds in accordance with applicable
laws, regulations, and guidance. However, we did identify instances of noncompliance with
applicable Federal requirements resulting in two LEAs improperly charging a total of about
$23,000 to the Title I grant. We did not identify any reportable issues with respect to these two
LEAs’ use of Recovery Act funds from the SFSF Education Stabilization and IDEA grants, or
the third LEA’s charges to any of the three grants reviewed.

For the Section 1512 reporting period ending December 31, 2009, we concluded that California
Education and the selected LEAs’ reporting processes provided reasonable assurance that all but
one of the reported data elements we reviewed were generally valid, accurate, and complete.
However, we did identify significant data quality issues related to the information California
Education reported on the number of jobs created or retained using Recovery Act funds. Based
on our review, we concluded that California Education reported jobs data that were not reliable
for the reporting period ending December 31, 2009. Moreover, control weaknesses in California
Education’s processes for compiling, processing, and reviewing the jobs data could affect the
Final Audit Report
ED-OIG/A09K0002                                                                        Page 2 of 27

reliability of future Section 1512 reports. We also concluded that the three LEAs we reviewed
submitted Title I school-level expenditure reporting required under the Recovery Act to
California Education on time and had accounting records that supported the reported
information.

This report discusses the (1) instances of improper use of Recovery Act funds and Section 1512
data quality issues we identified, (2) specific actions taken or planned to address our findings and
recommendations, and (3) additional actions needed to further enhance compliance with Federal
requirements and improve the quality of data reported in future Section 1512 reports. In the
Other Matters section of the report, we discuss the results of our review of LEA methodologies
for calculating interest earned on Federal cash advances, as well as a transparency issue related
to Section 1512 reporting of Recovery Act funds spent.

We provided a preliminary version of this report to the Governor’s Office of Planning and
Research (Planning and Research) and California Education for review and comment on
February 18, 2011. Planning and Research, which had transferred responsibility for
administering SFSF Education Stabilization funds to California Education, provided only
high-level comments that did not specifically address our findings and recommendations. In its
comments, Planning and Research stated that it is collaborating with California Education to
monitor and address issues identified in the audit report specific to the SFSF program and will
continue its efforts to ensure quality and accurate data. California Education did not state
whether it agreed with our findings and recommendations in its comments but did describe
corrective actions it was taking to resolve the findings, comply with the requirements of the
Recovery Act, and/or improve operations. In response to its comments related to Section 1512
reporting, we did address the need for California Education to take additional corrective actions.
Based on California Education’s comments, we did not modify our findings and
recommendations. California Education’s comments are summarized at the end of each finding.
The entire narrative of comments provided by Planning and Research and California Education
are included as an Enclosure to this report.


                                       BACKGROUND

The Recovery Act was signed into law on February 17, 2009, and had three immediate goals:
(1) create new jobs and retain existing ones, (2) spur economic activity while encouraging
investment in long-term growth, and (3) foster unprecedented levels of accountability and
transparency in government spending. To help achieve the third goal, recipients of Recovery Act
funds are required to submit quarterly reports on awards, spending, and job impacts under
Section 1512 of the Recovery Act. According to the Office of Management and Budget (OMB),
the reports should contain detailed information on the projects and activities funded by the
Recovery Act in order to provide the public with transparency into how Federal dollars are being
spent. The reports also help drive accountability for the timely, prudent, and effective spending
of Recovery Act funds.
Final Audit Report
ED-OIG/A09K0002                                                                                                           Page 3 of 27

The Department awarded $4.9 billion in SFSF Education Stabilization funds to Planning and
Research, which entered into an interagency agreement with California Education in May 2009.
The agreement designated California Education as the agency responsible for allocating and
distributing these funds to LEAs. In contrast, the Department awarded Recovery Act funds
totaling $1.5 billion for Title I and $1.2 billion for IDEA directly to California Education
because it is responsible for allocating and distributing non-Recovery Act funds under the Title I
and IDEA programs. California Education is responsible for administering all three grants
covered by this review and for reporting required Section 1512 data for the grants. As of
September 30, 2010, California had disbursed approximately 96 percent of the SFSF Education
Stabilization, 64 percent of the Title I, and 60 percent of the IDEA funds allocated to its LEAs.

California Education oversees the State’s elementary and secondary education system that served
more than 7 million students at more than 9,000 schools during school year 2009-2010.
California Education distributed all SFSF Education Stabilization funds not allocated to
institutions of higher education, along with most of the Title I and IDEA funds drawn down to
date, to more than 1,500 LEAs (subrecipients). California Education advanced Recovery Act
funds to the LEAs, which reported Section 1512 data to the State agency.

In the Figure below, we summarize the Recovery Act funding allocated to the three LEAs
selected for review—Fresno Unified School District (Fresno), San Diego Unified School District
(San Diego), and San Francisco Unified School District (San Francisco)—and the amount of
funds they received and spent as of September 30, 2010, for the grants covered by our review.




   Figure Notes: All percentages shown are based on the respective allocation amount.
                 In some cases, funds spent exceeded the amount of funds received because LEAs recognized obligations as funds
                 spent. For IDEA funds, LEAs were required to report incurred costs to California Education before receiving additional
                 IDEA funds.
Final Audit Report
ED-OIG/A09K0002                                                                                    Page 4 of 27

At the time of our review, the three LEAs had used or planned to use Recovery Act funds for a
variety of purposes including teacher salaries, summer school programs, supplemental
educational services, and other education-related purposes, as shown in Table 1.

    Table 1: Actual or Planned Use of Recovery Act Funds by Selected LEAs
                        SFSF Education
    LEA                                                 Title I                     IDEA
                         Stabilization
                  Major school building
                    renovations                                           Professional development
                                              Teacher, nurse, librarian,
    Fresno        School security officers                                Needs assessment
                                                and nurse’s aide salaries
                  Textbooks                                                 technology
                  Summer school program
                                                   Teacher salaries
                  Teacher salaries                                                  Employee benefits
                                                   Class size reduction
    San Diego     Supplemental employee                                             Teacher salaries
                                                   Supplemental education
                   retirement benefits                                              Instructional assistants
                                                     services

                  Teacher salaries                 Teacher salaries                 Non-public school services
    San
                  Transportation services          Transportation services          Coordinated early
    Francisco
                  Summer school program            Summer school program              intervention services



                             FINDINGS AND RECOMMENDATIONS

FINDING NO. 1 – California Education Needs to Ensure That LEAs Use Recovery Act
                Funds According to Federal Requirements

The three LEAs we reviewed generally used Recovery Act funds in accordance with applicable
Federal requirements. However, two of the three LEAs improperly charged about $23,000 to the
Recovery Act grant for unallowable Title I personnel and entertainment costs. The improper
costs were identified from a total of about $771,000 of Title I Recovery Act charges we reviewed
at the three LEAs.1

Fresno Charges for Personnel Costs

Fresno improperly charged personnel costs that were not allocable to the Title I grant. We
selected 20 payroll transactions and found improper charges for 4 LEA employees totaling
$20,457, which represented 18 percent of the total dollar amount of payroll transactions we
reviewed at Fresno. OMB Circular A-87, “Cost Principles for State, Local, and Indian Tribal
Governments,” Attachment A, Section C, describes the basic guidelines for determining the
allowability of costs. Part 3.a states that “[a] cost is allocable to a particular cost objective if the

1
  We used a risk-based approach to judgmentally select expenditure transactions to review at each LEA. Detailed
information on the number and amount of transactions we selected at each LEA and the respective universes of
transactions is provided in Table 2 of the Scope and Methodology section.
Final Audit Report
ED-OIG/A09K0002                                                                             Page 5 of 27

goods or services involved are chargeable or assignable to such cost objective in accordance with
relative benefits received.”

The improper charges included $15,097 in personnel costs associated with three health services
positions that were not allocable to the Title I grant–$8,368 for a nurse who did not work at a
Title I school and $6,729 for two health assistants who performed specialized services that
Fresno’s Fiscal Services Administrator told us did not benefit the Title I program.

Fresno’s Fiscal Services Administrator told us that the personnel costs were initially charged to
the Title I grant based on an estimated number of health services positions that the LEA expected
to fund using Recovery Act funds. When selecting employees for its estimate, the LEA
mistakenly included some employees whose duties were not allocable to the grant. Fresno used
the personnel costs associated with these employees as placeholders and planned to reconcile and
adjust the costs at the end of its fiscal year to reflect the actual time and effort charged to the
Title I grant. Although the year-end reconciliation might have eventually identified the improper
charges resulting in an adjustment to the amount charged to the grant, Fresno’s procedures for
estimating and reconciling grant expenditures resulted in overcharges to the Title I grant as of the
time of our review. More timely reconciliations are important because LEAs must submit
Recovery Act expenditure and jobs data to California Education on a quarterly basis.

Fresno also improperly charged $5,360 in personnel costs for an employee who was not
performing any Title I activities. Fresno’s Fiscal Services Administrator told us that these
personnel costs should have been charged to a non-Federal grant and attributed the error to an
accounting oversight.

In response to our finding, Fresno’s Fiscal Services Administrator informed us in
September 2010 that the LEA had made the appropriate adjustments to its financial system to
correct the improper charges. Because the corrections were made after our on-site work, we did
not verify them.

San Diego Charges for Nonpersonnel Costs

San Diego improperly charged entertainment costs to the Title I grant. We selected four
nonpersonnel transactions and found improper payments for two field trips totaling $2,950.
Although the improper costs represented only 3 percent of the total dollar amount of the
nonpersonnel transactions reviewed at this LEA, OMB Circular A-87, Attachment B specifically
prohibits charging entertainment costs to Federal grants:

       14. Entertainment. Costs of entertainment, including amusement, diversion, and social
       activities and any costs directly associated with such costs (such as tickets to shows or
       sports events, meals, lodging, rentals, transportation, and gratuities) are unallowable.
Final Audit Report
ED-OIG/A09K0002                                                                                    Page 6 of 27

The improper charges included $1,050 for the partial cost of a field trip to an amusement park
and $1,900 for a sport fishing trip. The two field trips were part of San Diego’s 10-to-Succeed
program. 2 A San Diego Budget Analyst told us that the amusement park trip included
specialized tours covering engineering components of the rides and was linked to classroom
goals for the participating students. The sport fishing trip was similarly linked to classroom
instruction in the sciences. Moreover, San Diego’s Federal and Special Programs Division office
had approved both trips. However, we concluded that these trips represented entertainment
under the definition provided in OMB Circular A-87 and, thus, were unallowable costs.

California Education’s Monitoring of Recovery Act Spending

We previously reported that California Education’s designed systems of control that were
intended to provide oversight of LEA Recovery Act spending had several areas in which controls
needed to be strengthened or established. Our prior review also identified instances in which
LEAs either had planned to or had actually used Recovery Act funds improperly. As a result, we
recommended that California Education improve existing monitoring procedures to (1) properly
account for the SFSF Education Stabilization, Title I, and IDEA funds provided under the
Recovery Act and (2) ensure timely and adequate oversight of LEA Recovery Act spending. In
response to our finding, California Education officials informed us that subrecipient monitoring
procedures were being developed to enhance accountability over LEA Recovery Act spending. 3

At the time we visited the three LEAs we reviewed, California Education had not performed any
monitoring of the LEAs’ Recovery Act spending. California Education’s Audits and
Investigations Division subsequently told us that a risk-based approach for selecting which LEAs
to monitor was adopted during spring 2010 in order to deploy monitoring resources more
efficiently. Additionally, California Education implemented an accountability information
system to track and account for LEA Recovery Act spending statewide.

Under its enhanced monitoring process, California Education conducted 17 on-site and
70 online reviews between April and June 2010 that looked at how LEAs spent SFSF Education
Stabilization funds.4 In January 2011, California Education expanded its monitoring reviews to
include the fiscal monitoring of other Federal funds, including Title I funds under the Recovery
Act. The fiscal monitoring reviews would cover LEA compliance with Federal requirements,
including timekeeping, allowable costs, supplement not supplant, cash management, allocation
of funds, and Section 1512 reporting. California Education began on-site reviews at 14 LEAs
and online reviews at 47 LEAs in January 2011. We encourage the Department to review


2
  10-to-Succeed is a school-based leadership development program (drop-out prevention and intervention) for ninth-
grade boys and girls identified as being disengaged from school. The program includes social activities to provide
the students with tangible rewards as well as to engage parents and other adults in motivating students to stay in
school. San Diego’s 14 high schools each received $10,000 in Title I funds under the Recovery Act to administer
the program.
3
 “American Recovery and Reinvestment Act of 2009: State and Local Controls over ARRA Funds in California”
(Audit Report, ED-OIG/A09J0006, January 15, 2010).
4
 As of June 2010, California Education still had not performed monitoring reviews at the three LEAs we reviewed
but had scheduled an on-site monitoring review of San Diego for May 2011.
Final Audit Report
ED-OIG/A09K0002                                                                           Page 7 of 27

California Education’s current LEA monitoring system to ensure that it will provide adequate
oversight of LEAs’ use of Recovery Act funds.

RECOMMENDATIONS

We recommend that the Director of the Implementation and Support Unit, in conjunction with
the Assistant Secretary for Elementary and Secondary Education, require California Education
to:

1.1       Ensure the deficiencies we identified for the Title I grant funded under the Recovery Act
          are corrected by (1) confirming that Fresno reimbursed its subgrant for the $20,457
          ($15,097 + $5,360) in personnel costs that were improperly charged for four employees
          and (2) requiring San Diego to reimburse its subgrant for the $2,950 in nonpersonnel
          costs that were improperly charged for two field trips.

1.2       Require Fresno to strengthen its estimation and reconciliation procedures to ensure that
          only personnel costs allocable to Title I are charged to the Title I grant funded under the
          Recovery Act. Procedures could include (1) selecting only eligible employees whose
          costs are allocable to the grant when estimating personnel costs, and (2) performing
          reconciliations of actual personnel activity each quarter to correspond with Section 1512
          reporting dates, rather than only at year-end.

1.3       Ensure that San Diego personnel responsible for charging or approving expenditures to
          Federal grants understand and follow Federal cost principles so that entertainment costs
          are not charged to Recovery Act grants in the future.

1.4       Notify LEAs statewide of the types of deficiencies identified in Finding No. 1 and
          instruct LEAs to identify and correct such deficiencies, if found, to ensure that similar
          unallowable costs are not charged to the Title I grant under the Recovery Act.

California Education Comments

California Education did not state whether it concurred with Finding No. 1 or the
recommendations in our report. However, California Education did provide details regarding
specific corrective actions it has initiated in response to each recommendation.

      •   Recommendation 1.1. California Education stated that it would request that Fresno and
          San Diego submit documentation of the reimbursements made to the appropriate
          Recovery Act subgrants by May 1, 2011.

      •   Recommendation 1.2. California Education stated that it would request that Fresno
          submit documentation of its (1) procedures to ensure that only personnel costs allocable
          to the Title I grant are charged under the Recovery Act and (2) reconciliations of actual
          personnel activities each quarter to correspond with Section 1512 reporting dates, by
          May 1, 2011.
Final Audit Report
ED-OIG/A09K0002                                                                      Page 8 of 27

   •   Recommendation 1.3. California Education stated that it has scheduled a monitoring
       visit during May 2011 to evaluate San Diego’s compliance with applicable Federal
       requirements and to provide technical assistance to ensure that San Diego is spending
       Recovery Act funding appropriately.

   •   Recommendation 1.4. California Education stated that it has increased its efforts to
       ensure that LEAs spend Recovery Act funds in accordance with Federal requirements by
       providing links to guidance posted on its Web page, conducting webinars, and providing
       technical assistance during monitoring visits and by telephone. By April 15, 2011,
       California Education planned to provide additional guidance specific to the types of
       deficiencies identified in Finding No. 1.

The corrective actions identified by California Education that have already been taken or are
planned sufficiently address our recommendations. We did not modify our finding or
recommendations based on California Education’s comments.


FINDING NO. 2 – California Education Needs to Ensure Reported Jobs Data Are
                Complete, Accurate, and Consistent with Reporting Guidance
California Education did not report jobs data in accordance with Federal guidance. For the
reporting period ending December 31, 2009, we identified Section 1512 data quality issues
related to the jobs data that California Education reported for the SFSF Education Stabilization,
Title I, and IDEA grants funded by the Recovery Act. As a result, the reported jobs data were
not reliable and did not accurately portray the jobs impact of the Recovery Act funds allocated to
LEAs in California. Some LEAs’ jobs estimates were not accurate and/or did not recognize all
jobs paid with Recovery Act funds. Furthermore, California Education’s reviews were not
adequate to detect LEA reporting errors. Significant changes to OMB reporting guidance and an
earlier than expected Federal reporting deadline also contributed to the data quality issues.
Lastly, California Education did not issue reporting guidance to LEAs that clearly communicated
the Section 1512 reporting requirements in a timely manner. LEA jobs estimates must be
complete and consistently estimated and accurately reflect jobs resulting from Recovery Act
funds in order for the reported jobs data to be valid, reliable, and transparent. Although
California Education did not report accurate jobs data for the reporting period ending
December 31, 2009, correction of the reporting errors is not warranted. OMB Memorandum
M-10-34, “Updated Guidance on the American Recovery and Reinvestment Act,”
September 24, 2010, prohibits recipients from making changes to the jobs data for prior
Section 1512 reports.

California Education’s Reported Jobs data

For the reporting period ending December 31, 2009, the jobs data that California Education
reported were not complete, accurate, or consistently estimated in accordance with OMB
Memorandum M-10-08, “Updated Guidance on the American Recovery and Reinvestment
Act–Data Quality, Non-Reporting Recipients, and Reporting of Job Estimates,”
December 18, 2009 (OMB guidance M-10-08). California Education already had compressed
Final Audit Report
ED-OIG/A09K0002                                                                                       Page 9 of 27

reporting timelines so that LEAs could submit data as close to the end of the reporting period as
possible in order to generate complete and timely data. California Education also needed time to
compile and review LEA data before submitting recipient reports to the State’s centralized data
collection system ahead of State and Federal reporting deadlines. Unanticipated changes to
Section 1512 reporting requirements and the deadline for the reporting period ending
December 31, 2009, placed additional strain on California Education’s timelines and review
processes.

Change to OMB Jobs Estimation Guidance. OMB guidance M-10-08 substantially revised the
method for estimating jobs specified in earlier OMB and Department guidance. OMB guidance
M-10-08 advised recipients to estimate jobs on a quarter basis using the number of hours paid
with Recovery Act funds divided by the number of hours applicable to a full-time employee
schedule. About a week before OMB guidance M-10-08 was issued, California LEAs submitted
jobs estimates following Department guidance 5 in effect at the time, which was based on OMB
Memorandum M-09-21, “Implementing Guidance for the Reports on Use of Funds Pursuant to
the American Recovery and Reinvestment Act of 2009,” June 22, 2009 (OMB guidance
M-09-21). OMB guidance M-09-21 advised recipients to assess the staffing implications caused
by the infusion of Recovery Act funds and report jobs on a cumulative basis. To comply with
the updated OMB guidance M-10-08, California Education needed all LEAs to revise their jobs
estimates to only reflect the quarterly jobs impact.

OMB anticipated that some recipients would have difficulty responding to the updated reporting
guidance and instructed recipients to follow the guidance to the greatest extent possible. OMB
also encouraged Federal awarding agencies to work closely with recipients to address the
potential challenges associated with the revised jobs estimation approach and to consider
recipients’ efforts and the complexities of the reporting changes when reviewing Section 1512
reports during the continuous correction period. 6

In response to OMB guidance M-10-08, California Education called the Department’s Office of
Elementary and Secondary Education on January 25, 2010, to express concern that the State’s
already compressed reporting timelines would not accommodate collecting, compiling, and
reporting revised jobs data from the State’s more than 1,500 LEAs by the end of the continuous
correction period. During the call, Department officials advised California Education to collect
and report revised jobs data in accordance with the updated guidance. However, California
Education waited almost another month to instruct LEAs to review and resubmit jobs estimates
only if needed. California Education officials told us they combined the resubmission of LEA

5
 “Clarifying Guidance on American Recovery and Reinvestment Act of 2009 Section 1512 Quarterly Reporting,”
U.S. Department of Education, September 2009.
6
  No later than 10 days after the end of each reported quarter (calendar quarter), recipients must submit Section 1512
data to the FederalReporting.gov Web site, the nationwide Recovery Act data collection system. A continuous
correction period takes place between this initial data submission and the end of the quarter in which the data were
submitted. During the continuous correction period, Federal agencies are required to review the data reported by
recipients and notify them of data errors that need to be corrected. Recipients and subrecipients should also review
their submitted data and make necessary corrections. At the end of the continuous correction period, recipient data
are considered final and made available on Recovery.gov, a Web site designed to provide the public with transparent
and easily retrievable Recovery Act information.
Final Audit Report
ED-OIG/A09K0002                                                                                 Page 10 of 27

jobs estimates with the next quarter’s data collection to ease the reporting burden on LEAs. We
also noted that, less than 2 weeks before the LEAs were to submit revised jobs estimates,
California Education further clarified that all LEAs were to resubmit jobs estimates even if the
estimates had not changed or an LEA considered the revision unnecessary.

Change in Federal Reporting Deadline. California Education’s data collection process was
further complicated when the continuous correction period was shortened by 2 weeks.
On February 23, 2010, California Education instructed LEAs to submit revised jobs estimates by
March 15. A few days after this instruction, the end of the continuous correction period
specified in FederalReporting.gov was changed from the end of March to mid-March 2010.
The earlier deadline was not compatible with the internal reporting deadline specified in LEA
guidance that California Education distributed just days before. Consequently, California
Education had to move up the LEA resubmission deadline to March 10 to meet the earlier than
anticipated Federal reporting deadline.

Accuracy and Completeness of LEA Jobs Data
California Education’s resubmission guidance appeared to confuse some LEAs. For the
reporting period ending December 31, 2009, LEAs statewide did not submit revised jobs
estimates for more than half of all subawards for the three Recovery Act grants we reviewed. 7
Some LEAs’ jobs estimates were not included in California Education’s reported jobs data
because the LEAs did not resubmit jobs estimates. Other LEAs resubmitted jobs estimates that
were unchanged from the initial estimates. Although California Education attempted to compile
revised jobs estimates and report jobs data in accordance with OMB guidance M-10-08, the
resubmission timelines precluded adequate data review and resulted in jobs data that were not
complete, accurate, or consistent with the OMB guidance.
Some LEAs Did Not Resubmit Jobs Data. California Education’s final jobs data did not include
jobs estimates for LEAs that did not resubmit jobs estimates. For example, two of the three
LEAs we reviewed did not resubmit jobs estimates for all three of the Recovery Act grants
reviewed. Fresno initially submitted 316 jobs for IDEA and San Diego submitted 117 jobs for
Title I, but neither LEA resubmitted a jobs estimate. As a result, California Education excluded
the two LEAs’ initial estimates from its final jobs data. According to internal statewide LEA
data, California Education excluded more than 4,500 jobs related to about 450 subawards
because LEAs did not resubmit jobs estimates.
Some LEAs Resubmitted Unchanged Jobs Data. California Education’s final jobs data may
have included inaccurate LEA jobs estimates because some LEAs resubmitted the same
cumulative estimates as initially submitted instead of changing their estimates in accordance with
OMB guidance M-10-08. Earlier OMB guidance M-09-21 advised recipients to estimate jobs
using data from current and prior quarters and make subjective judgments on the jobs impacts of
Recovery Act funds. Under this guidance, LEAs’ initial estimates would be cumulative and
could include jobs paid with non-Recovery Act funds. OMB guidance M-10-08 changed the
jobs estimation methodology and definition of a job created or retained whereby recipients were
7
 Some LEAs submitted revised jobs estimates for some but not all of the three grants we reviewed. Hence, we
counted the number of subawards to LEAs for each grant.
Final Audit Report
ED-OIG/A09K0002                                                                                     Page 11 of 27

to estimate jobs on a quarter basis and report only those jobs paid with Recovery Act funds.
According to internal statewide LEA data, LEAs resubmitted jobs estimates that were identical
to their initial submission for 37 percent of all subawards for the three grants we reviewed.
LEA Procedures for Estimating Jobs

The three LEAs we reviewed used jobs estimation methods that generally conformed to
OMB guidance M-10-08 for the Section 1512 reporting period ending December 31, 2009.
However, the LEAs did not recognize all jobs resulting from Recovery Act subawards. Fresno
and San Diego used data already available in their accounting systems to determine the number
of jobs supported by Recovery Act funding. Although their jobs estimation methods were not
aligned with the original method specified in Department guidance and OMB guidance M-09-21,
the two LEAs’ methods were inadvertently similar to an alternative methodology addressed in
the updated OMB guidance M-10-08. 8 San Francisco initially followed the Department’s
September 2009 guidance to estimate jobs and, in response to OMB guidance M-10-08, revised
its estimates using information available in its accounting systems. Even though their job
estimation methodologies appeared reasonable, the three LEAs omitted jobs associated with
summer school programs and/or other entities’ jobs paid with Recovery Act funds.

OMB guidance M-10-08 addresses the extent that recipients should collect information about
subrecipient and vendor jobs:

        [P]rime recipients are required to generate estimates of job impact by directly collecting
        specific data from sub-recipients and vendors on the total FTE [full-time equivalent]
        resulting from a sub-award.[9] To the maximum extent practicable, information should be
        collected from all sub-recipients and vendors in order to generate the most
        comprehensive and complete job impact numbers available.

Summer School Jobs. San Francisco omitted jobs paid with Recovery Act funds for a summer
school program held in 2009. San Francisco used SFSF Education Stabilization and Title I funds
to pay salaries for teaching positions during the school year and for extended calendar and




8
  All three LEAs generally estimated jobs on the basis of annual salaries using a variation of OMB’s definite-term
methodology by calculating jobs based on Recovery Act-funded salary expenses divided by an applicable annual
salary. Thus, salary expenses charged to the Recovery Act grants were directly attributable to actual positions and
jobs estimates appeared reasonable. Linking salary expenses to an hourly measurement of jobs was consistent with
OMB guidance M-10-08.
9
  The requirement for reporting estimates of the “Number of Jobs” is based on a calculation used to avoid
overstating the number of other than full-time permanent jobs. This calculation converts part-time or temporary jobs
into fractional FTE jobs. FTE employment is a standard concept that is also used by the Office of Personnel
Management.
Final Audit Report
ED-OIG/A09K0002                                                                                 Page 12 of 27

overtime periods during the summer school program. 10 However, San Francisco only recognized
the salaries of full-time teaching positions paid during the regular school year. San Francisco
misinterpreted California Education’s reporting guidance to mean that only salaries for regular
full-time schedules equated to jobs paid with Recovery Act funds. On August 26, 2010, the
Department issued guidance, “Clarifying Guidance on the American Recovery and Reinvestment
Act of 2009,” affirming that the summer school jobs should have been included:

        [I]f an employee is fully funded by ARRA [Recovery Act] and works additional hours
        beyond the full-time schedule that are also funded by ARRA, the employee would be
        reported as more than 1 FTE. For example, if a teacher worked in a summer school
        program in addition to a full-time schedule and the time worked in that summer school
        program is roughly equivalent to 50 percent of a full-time schedule in one quarter, the
        teacher would be reported as 1.5 FTE for that quarter.

Other Entities’ Jobs. All three LEAs omitted vendor or non-public school and agency jobs paid
with Recovery Act funds, contrary to California Education guidance. On November 17, 2009,
California Education issued guidance requiring LEAs to include vendor jobs in their jobs
estimates. On February 23, 2010, it issued additional guidance to clarify LEA reporting of other
entities’ jobs:

        [J]obs counted should include jobs created/retained by other entities such as
        sub-awardees and vendors. For example, Special Education Local Plan Areas (SELPAs)
        should count jobs created/retained in their constituent agencies.… A vendor does not
        include a sub-grantee that provides the services supported by the grant. For example, a
        SELPA payment to constituent school district or to a non-public school for special
        education services would not be considered a payment to a vendor.11

San Francisco correctly calculated and submitted vendor jobs to California Education. However,
San Francisco did not submit data for jobs supported by special education service agreements
with constituent non-public schools and agencies, which accounted for more than $6 million in
IDEA funds under the Recovery Act.
Fresno and San Diego did not submit all vendor jobs resulting from Recovery Act funds.
Fresno’s Fiscal Services Administrator told us that most of Fresno’s vendors were unresponsive
to requests for jobs information. In response to our finding, Fresno enhanced its outreach efforts
to ensure more accurate vendor jobs estimates. San Diego’s Senior Financial Accountant told us
that the LEA was aware of the reporting requirement but did not submit any vendor jobs because
California Education’s guidance did not identify a method for collecting and using jobs
information from vendors. Our review of several San Diego service contracts with vendors
found that some contracts contained information that could have been used to estimate vendor

10
  San Francisco spent $686,145 in SFSF Education Stabilization funds and $164,250 in Title I funds under the
Recovery Act on salaries for summer school teachers. Based on California Education’s expectation of $50,000 of
salary expenses per job (used as a data reasonableness check), San Francisco’s summer school salary expenses
would have equated to 17 additional jobs.
11
  In California, the SELPA is the LEA for IDEA funding purposes. A SELPA may be a single school district, or it
may be composed of multiple districts. In a multi-district SELPA, the SELPA may provide special education
services for member districts or disburse funds to districts to provide services.
Final Audit Report
ED-OIG/A09K0002                                                                                Page 13 of 27

jobs. Although Fresno and San Diego did not appear to have many vendor jobs paid with
Recovery Act funds, omitting even a small number of jobs at individual LEAs could have
material implications when the jobs data are aggregated for the entire State. According to an
internal California Education report, less than 4 percent of the more than 1,500 LEAs statewide
submitted vendor jobs paid with SFSF Education Stabilization funds for the reporting period
ending December 31, 2009.
Several U.S. Government Accountability Office (GAO) reports also identified data quality issues
related to vendor jobs at California Education. In March 2010, GAO reported that California
LEAs did not collect and submit consistent information on vendor jobs, in part due to unclear
guidance. In May 2010, GAO again reported that some LEAs were underreporting vendor
jobs. 12 In response to the GAO reports, California Education issued detailed reporting guidance
on vendor jobs, including a vendor job tracking form, to provide a standard method for LEAs to
request vendor and other entities’ job information. Moreover, the California State Auditor
reported that the State’s central Recovery Act unit provided training to California Education and
LEAs in June 2010 that addressed the reporting of vendor jobs. These efforts are positive steps
to better ensure that LEAs submit complete and consistent jobs data, including vendor jobs, in
future Section 1512 reports.
California Education’s Review of LEA Jobs Estimates

For the reporting period ending December 31, 2009, California Education did not perform all
necessary review procedures on LEA jobs data associated with the SFSF Education Stabilization,
Title I, and IDEA grants funded under the Recovery Act. As a result, California Education did
not detect significant errors in LEA jobs estimates and reported inaccurate jobs data to
FederalReporting.gov. Furthermore, control weaknesses in its review procedures resulted in
California Education reporting jobs data that did not achieve OMB’s minimum standard for
Recovery Act data quality. OMB guidance M-09-21 addressing data quality states:

        At a minimum, Federal agency, recipients, and sub-recipients should establish internal
        controls to ensure data quality, completeness, accuracy and timely reporting of all
        amounts funded by the Recovery Act.

California Education’s Section 1512 reporting consultant told us that review procedures included
reasonableness checks of LEA jobs estimates, including an assumption that each job equates to
$50,000 of salary paid with Recovery Act funds. One such reasonableness check was to
compare LEA jobs and expenditure data using the salary threshold. The consultant emphasized
that California Education did not have LEA-specific information about the uses of Recovery Act
funds, which would be needed to perform comprehensive assessments on all LEAs’ jobs
estimates. Therefore, reasonableness checks generally focused on the State’s 10 largest LEAs.
However, review procedures also included a check of the complete statewide jobs database to
identify outliers in individual LEAs’ jobs estimates.


12
 “Recovery Act: California’s Use of Funds and Efforts to Ensure Accountability,” GAO (Testimony,
GAO-10-467T, March 5, 2010); “Recovery Act: States’ and Localities’ Uses of Funds and Actions Needed to
Address Implementation Challenges and Bolster Accountability (California),” GAO (Report to the Congress,
GAO-10-605SP, May 2010).
Final Audit Report
ED-OIG/A09K0002                                                                      Page 14 of 27

Based on our review of its statewide LEA jobs database, we identified reporting errors that
California Education should have detected if it had performed established reasonableness checks.
For example, one LEA estimated 5,800 jobs for Title I and 3,200 jobs for SFSF Education
Stabilization, yet employed fewer than 10 teachers. This LEA had the highest jobs estimates for
Title I and the second highest for SFSF Education Stabilization statewide even though it reported
no expenditures for the two subawards. We identified similar discrepancies in the jobs estimates
and expenditure data for other LEAs. However, the one LEA’s errors alone resulted in
California Education overreporting Title I jobs by 147 percent and SFSF Education Stabilization
jobs by almost 10 percent statewide.

In January 2010 (ED-OIG/A09J0006), we reported that California Education’s compressed
timelines for developing, testing, and implementing its reporting system could increase the risk
of inaccurate and incomplete data. At that time, California Education was developing
subrecipient monitoring procedures for Recovery Act reporting to ensure the quality of LEA jobs
estimates. In the report, we encouraged California Education to (1) take full advantage of the
continuous correction period to correct and disclose data quality issues for each reporting period,
(2) implement planned controls for its data collection system, and (3) assess and modify controls
as needed.

For the reporting period ending December 31, 2009, California Education’s compressed
reporting timelines prevented it from taking full advantage of the continuous correction period to
identify, disclose, and correct data quality issues. As previously noted, LEAs were to resubmit
revised jobs estimates only 5 days before the end of the continuous correction period. Coupled
with the lack of appropriate data quality reviews, the internal timelines adversely affected
California Education’s ability to meet OMB’s standard of internal controls to ensure complete,
accurate, and timely reporting of Recovery Act information. California Education must ensure
that its processes and timelines for compiling and reviewing LEA jobs estimates are adequate to
ensure the quality of reported Recovery Act data. For future Section 1512 reporting periods,
California Education enhanced its review procedures to include additional reviews and
reasonableness checks of jobs estimates for 17 large LEAs. Although focusing review efforts on
large LEAs is an important component of a risk-based approach to ensuring data quality,
California Education should ensure that it has adequate review procedures in place to ensure all
LEAs statewide submit quality data.

We did not evaluate the effectiveness of California Education’s enhanced review procedures
during our review. However, recent GAO and California State Auditor reports provide updated
information about California Education’s review procedures and related issues. In its May 2010
report (GAO-10-605SP), GAO reported that California Education’s data reliability strategies did
not always identify questionable LEA jobs estimates for the reporting period ending
March 31, 2010. In its report, GAO suggested additional reviews of the 10 largest LEAs’ data
and methodologies, which would account for a large portion of Recovery Act funding and could
help identify systemic reporting problems. In its September 2010 report (GAO-10-1000SP),
GAO noted that California Education did perform additional reasonableness checks for the
10 largest LEAs for the reporting period ending June 30, 2010. In December 2010, the
California State Auditor reported that California Education did not adequately review
subrecipients’ jobs calculation methodologies and supporting documentation for Section 1512
Final Audit Report
ED-OIG/A09K0002                                                                              Page 15 of 27

reporting or ensure that all subrecipient data were submitted. Although California Education
expanded its existing on-site monitoring reviews for the reporting period ending March 31, 2010,
the State Auditor reported that on-site and online reviews were suspended for the reporting
period ending June 30, 2010. Delays in enacting the State budget precluded travel to LEAs, and
California Education wanted to keep online reviews on a consistent schedule with the on-site
reviews. 13 California Education resumed on-site and online reviews beginning January 2011.

RECOMMENDATIONS
We recommend that the Director of the Implementation and Support Unit, in conjunction with
the Assistant Secretary for Elementary and Secondary Education and the Assistant Secretary for
Special Education and Rehabilitative Services, require Planning and Research and California
Education to:
2.1     Implement appropriate data quality controls, including taking full advantage of the
        continuous correction period, to perform review procedures on LEA jobs estimates to
        ensure the reported jobs data are accurate, complete, and consistent with applicable
        guidance. When data quality issues are identified, correct the errors in a timely manner
        and notify the Department of any material omissions and significant reporting errors.

2.2     Assess internal data quality monitoring processes on an ongoing basis to ensure they
        continue to be appropriate and effective.

2.3     Ensure that the timing of LEA data collections in future reporting periods allows
        sufficient time to perform all necessary data quality reviews and to respond to unforeseen
        circumstances without reducing the effectiveness of established data review processes.
2.4     Ensure that all future Section 1512 reporting guidance issued to subrecipients is clear,
        timely, and consistent with changes to OMB and Department guidance to ensure LEAs
        can understand and adhere to Section 1512 reporting requirements.

2.5     Notify LEAs statewide of the types of deficiencies identified in Finding No. 2 to ensure
        that similar reporting errors do not occur in future Section 1512 reports.

California Education Comments

California Education did not state whether it concurred with Finding No. 2 or the
recommendations in our report, nor did it identify specific corrective actions it has initiated in
response to each recommendation. Instead, California Education identified the following steps it
has taken to ensure reported jobs data are complete, accurate, and consistent with guidance:
(1) provided guidance to LEAs with emphasis on correct job reporting methodologies and
correcting deficiencies identified in previous quarterly reports; (2) reviewed jobs data for
reasonableness prior to Federal submission and contacted LEAs to resolve questionable data; (3)

13
 “American Recovery and Reinvestment Act of 2009: The California Recovery Task Force and State Agencies
Could Do More to Ensure the Accurate Reporting of Recovery Act Jobs,” California State Auditor (High Risk
Update, 2010-601, December 2010).
Final Audit Report
ED-OIG/A09K0002                                                                               Page 16 of 27

notified LEAs of the continuous correction period and encouraged LEAs to make corrections
during that time; (4) placed greater data checks on the 10 largest LEAs; and (5) included selected
Recovery Act programs in monitoring reviews to ensure reported jobs data are complete and in
accordance with Federal guidance.

OIG Response

The steps described in California Education’s comments appear to partially address
Recommendation 2.1 but not our remaining four recommendations. As a result, California
Education’s stated actions are not sufficient to correct the deficiencies identified in our finding or
to prevent or detect future data quality issues. As stated in Recommendation 2.1, California
Education needs to ensure procedures are in place to correct data errors in a timely manner and
notify the Department of any material omissions and/or significant reporting errors. To ensure
accurate, reliable, and complete Section 1512 data are reported in accordance with Recovery Act
reporting requirements, California Education should also develop policies and procedures and
take other steps to fully implement Recommendations 2.2 through 2.5. We did not modify our
finding or recommendations based on California Education’s comments.


                                         OTHER MATTERS

LEA Interest Calculation Methodologies

For the three LEAs we reviewed, methodologies for calculating interest earned on Federal cash
advances did not fully adhere to California Education’s guidance and instructions for calculating
interest earnings. We previously reported cash management issues in California related to the
(1) lack of LEA compliance with the Federal requirement to remit interest earned on advances of
Federal program funds and (2) LEAs’ inability to accurately calculate and timely remit interest
earned on Federal funds provided under the Recovery Act and other Federal education grants. 14
In response to this work, California Education issued guidance to LEAs on Federal interest
requirements in December 2008 and more detailed interest calculation instructions in
January 2010. These guidance documents were generally consistent with Federal requirements.

During our current audit, we reviewed LEA compliance with Federal cash management
requirements and found that the three LEAs had calculated interest earned on Federal cash
balances and remitted or planned to remit the interest to California Education as required.
However, the three LEAs’ calculation methodologies did not use the average daily cash balance
across all Federal programs for each day of the quarterly reporting period. Moreover, the three
LEAs calculated interest earnings over fiscal periods that varied for each LEA, and one LEA had
not remitted any of its interest earnings. Two LEAs incorrectly offset negative cash balances
against positive cash balances and used the resulting negative balance to determine interest
liabilities (netting) even though California Education's guidance expressly prohibited the netting
of interest. One of the two LEAs also incorrectly calculated interest for its Recovery Act funds

14
  “California Department of Education Advances of Federal Funding to Local Educational Agencies” (Audit
Report, ED-OIG/A09H0020, March 9, 2009); ED-OIG/A09J0006.
Final Audit Report
ED-OIG/A09K0002                                                                     Page 17 of 27

separate from other Federal education funds instead of combining cash balances from all Federal
sources. The calculation errors described above resulted in Fresno and San Diego overstating
their interest liabilities by about $320,000 and $87,000, respectively. In contrast, San Francisco
understated its interest liability by almost $5,400.

In response to our audit, the three LEAs sought technical assistance from and worked with
California Education to revise their interest calculation methodologies and resolve discrepancies
in the amount of interest earned and remitted. California Education's Audits and Investigations
Division subsequently confirmed that the three LEAs’ methodologies and interest calculations
were in compliance with its guidance. In August 2010, California Education issued a letter to all
LEA and charter school officials reminding them of the Federal requirements for remitting
interest earned on advances of Federal program funds.

California Education’s Reported Amount of Recovery Act Funds Spent

California Education’s reported amount of funds spent may not reflect the actual cumulative
amount of Recovery Act funds spent by LEAs or provide optimal transparency for users of the
Recovery.gov Web site. OMB’s Section 1512 reporting guidance specifies that recipients are to
report their disbursements to subrecipients as Recovery Act funds spent. California Education
appropriately reported the amount of Recovery Act funds disbursed to LEAs as funds spent for
the three grants we reviewed. Even though California Education reported the data as specified in
Federal guidance, the reported amount may not present an accurate or complete picture of what
had actually been spent because California Education advanced Federal funds to LEAs. We
previously reported (ED-OIG/A09J0006) cash management issues related to California
Education’s practice of disbursing Federal funds to LEAs without information about whether the
LEAs needed the funds at the time of disbursement, which resulted in some LEAs receiving
Recovery Act funds too early.

For Section 1512 reporting purposes, California Education required LEAs to track and report
their actual spending related to the Recovery Act subawards and used these data to determine
project status. Based on a comparison of disbursement amounts that were posted to
Recovery.gov and LEA expenditure data from an internal California Education report, we
determined that the reported amount of Recovery Act funds spent exceeded LEAs’ actual
expenditures by about $1.3 billion, or 48 percent, for SFSF Education Stabilization and more
than $280 million, or over 160 percent, for Title I. For example, San Diego received most of its
$52 million SFSF Education Stabilization allocation in June 2009 but had not spent any of the
funds as of December 31, 2009. Instead of being invested in the economy, the almost
$1.6 billion in unspent Recovery Act funds were held in LEAs’ bank accounts when the
reporting period ended on December 31, 2009. California Education did post LEA expenditure
data on its Web site, which provided the public with information on LEAs’ actual spending.

In a September 2010 report to the Recovery Accountability and Transparency Board, we
identified grant recipients reporting disbursements to subrecipients as Recovery Act funds spent
as a transparency issue that could distort the true amount of Recovery Act funds invested in the
economy. In the report, we recommended that the Recovery Accountability and Transparency
Board explore opportunities to increase the transparency of information available on
Final Audit Report
ED-OIG/A09K0002                                                                                 Page 18 of 27

Recovery.gov, including evaluating the feasibility of requiring recipients to report subrecipients’
actual funds spent. 15


                                 SCOPE AND METHODOLOGY

The purpose of our audit was to determine whether (1) selected LEAs used Recovery Act funds
in accordance with applicable laws, regulations, and guidance; and (2) California Education and
selected LEAs reported data that were accurate, reliable, complete, and in compliance with
Recovery Act reporting requirements. Our review covered three LEAs—Fresno, San Diego, and
San Francisco—which received Recovery Act funds through allocations from California
Education. Our review also included California Education, the State agency responsible for
administering the selected grants including required Recovery Act reporting.

Our review covered three education-related grants under the Recovery Act. The three grants
comprised most of the nearly $9 billion in education-related Recovery Act funding that the
Department had allocated to California. For each grant, the original authorizing statute,
abbreviated program name, and Catalog of Federal Domestic Assistance number assigned for
grant-tracking purposes are identified below:

     •   Recovery Act, Title XIV
         o SFSF Education Stabilization (84.394)
     •   Elementary and Secondary Education Act of 1965, as amended
         o Title I Part A Basic Grants to LEAs (84.389)
     •   IDEA, as amended
         o Part B Section 611 Special Education Grants to States (84.391)

To gain an understanding of the requirements applicable to our audit objectives, we reviewed
Federal laws, regulations, OMB Circulars, and OMB and Departmental guidance specific to the
grants we reviewed.

To address the audit objectives, we performed work at California Education and three selected
LEAs. At the State level, we interviewed California Education Fiscal Policy Division and Audits
and Investigations Division officials responsible for subrecipient monitoring and Section 1512
reporting. We also reviewed California Education’s policies, procedures, and LEA guidance to
gain an understanding of their processes and controls for monitoring LEAs’ use of funds and for
compiling, processing, and reviewing LEA jobs estimates. We also reviewed and considered the
results and findings of prior California Education Single Audits, other State reviews, GAO
reports, and Department program monitoring visits to identify areas of potential control
weaknesses related to our audit objectives. In addition, we met with representatives from the
California Technology Agency, the agency responsible for administering the State’s centralized
reporting system for submitting Section 1512 data to FederalReporting.gov, to gain an
understanding of (1) how the California Education data collection system interfaced with the

15
 “Recovery Act Data Quality: Recipient Efforts to Report Reliable and Transparent Information” (Final Report,
ED-OIG/S20K0002, September 13, 2010).
Final Audit Report
ED-OIG/A09K0002                                                                       Page 19 of 27

State’s centralized reporting system, (2) roles and responsibilities of key personnel, and (3)
reporting system controls already in place.

At the local level, we judgmentally selected three LEAs—Fresno, San Diego, and San
Francisco—that were among the 10 largest LEAs in the State in terms of the amount of Recovery
Act funds allocated and spent under the SFSF Education Stabilization, Title I, and IDEA grants.
When selecting the LEAs, we also considered such factors as: (1) geographical diversity;
(2) whether California Education considered the LEA to be high risk; (3) findings from prior
single audits, ED-OIG audits, other State reviews, and Departmental program monitoring visits;
and (4) whether GAO was conducting, or planned to conduct, work at the LEA.

At each LEA, we interviewed fiscal and program officials responsible for administering
Recovery Act grants and reporting Section 1512 data to California Education. We also reviewed
LEA policies and procedures to gain an understanding of their processes for approving Recovery
Act expenditures, and compiling and submitting Section 1512 data to California Education. We
also reviewed and considered the results and findings of prior Single Audits as well as State and
Departmental program monitoring visits in order to identify areas of potential risk or control
weaknesses at each LEA.

Use of Funds: We performed limited assessments of the three selected LEAs’ policies and
procedures by selecting a judgmental sample of personnel and nonpersonnel expenditure
transactions at each LEA to determine whether costs charged to Recovery Act grants complied
with applicable laws, regulations, and guidance. Using a risk-based approach, we selected a total
of 110 transactions totaling more than $7.4 million for the period July 1, 2009, through
April 30, 2010. For personnel expenditures, we selected transactions that represented a higher
than expected amount for a particular position, such as higher than average teacher salaries.
For nonpersonnel expenditures, we reviewed LEA accounting records to identify large dollar
purchases of goods and services and considered whether the expenditures were specifically
prohibited under the Recovery Act. We summarize the personnel and nonpersonnel costs and
number of transactions selected for testing in Table 2 at the end of this report section.

To test personnel costs, we reviewed computer-generated records and documents from LEA
payroll and human resource systems to confirm that persons paid with Recovery Act funds were
actually employed by the LEA. We verified that employees paid with Title I or IDEA funds
worked respectively at a Title I school or in a special education capacity. For employees paid
with SFSF Education Stabilization funds, we reviewed job descriptions to determine whether the
employee performed activities specifically prohibited under the Recovery Act. For all three
grants, we confirmed that the selected employees were paid correctly by comparing recorded
payment amounts to salary schedules and then tracing the payments to bank verification
documents, such as electronic funds transfer reports or copies of cancelled checks. To test
nonpersonnel costs, we reviewed applicable contracts, invoices, and purchase orders. We traced
each transaction to supporting documents, confirmed that authorized LEA officials approved the
supporting contracts and purchase orders, and verified that payments were correctly made by
reviewing electronic funds transfer reports or copies of cancelled checks. Because we
judgmentally selected the personnel and nonpersonnel expenditure transactions included in our
Final Audit Report
ED-OIG/A09K0002                                                                      Page 20 of 27

review, the results presented in this report cannot be projected to the universe of more than
$100 million in costs that the three LEAs incurred for the period covered by our review.

To assess compliance with Federal cash management requirements, we determined whether the
three LEAs had policies and procedures in place to correctly calculate and timely remit interest
earned on Federal cash balances. We reviewed the reasonableness of LEA interest calculations
to determine whether they were calculated in accordance with California Education's
January 2010 guidance. We also reviewed LEA interest calculation methodologies and
worksheets, accrued interest amounts, interest remittance schedules, and interest checks/warrants
submitted to California Education, as well as applicable guidance issued by California Education
and County Offices of Education.

We relied on computer-processed data contained in the accounting systems of the three selected
LEAs for purposes of testing expenditures and reviewing interest calculations. Based on our
testing as described above, we determined that the computer-processed data were sufficiently
reliable for the purposes of this audit.

Data Quality: To evaluate data quality, our review focused on Section 1512 reporting for seven
data elements—estimated number of jobs created or retained, vendor information, project status,
and the amount of funds awarded, subawarded, received, and spent—reported by California
Education and/or submitted by LEAs to California Education for the period ending
December 31, 2009. We evaluated California Education’s data collection and review procedures
and reviewed actions taken to enhance data quality for subsequent reporting periods. We
performed limited analytical checks on statewide LEA data to determine whether California
Education’s control processes were adequate to detect and correct significant errors or omissions
in LEA submitted data. We also reviewed California Education’s processes for pre-populating
LEA information in its data collection system and reviewing the quality of LEA data
submissions. We also evaluated California Education’s process for compiling statewide LEA
data to determine the reported Section 1512 amounts. Lastly, we performed reasonableness and
logic checks on the data that California Education reported to FederalReporting.gov. At the
three LEAs, we reviewed supporting documentation for Section 1512 data that each LEA had
submitted to California Education and traced selected data elements through State and Federal
reporting systems. We also relied on our testing of LEA personnel costs to confirm that reported
jobs were attributable to actual salaries paid with Recovery Act funds.

For Recovery Act Title I school-level expenditure reporting, we verified the reasonableness of
each of the three LEAs’ data by tracing selected expenditures from the reports to the expenditure
detail recorded in the LEAs’ accounting systems. We also reconciled minor differences between
the total number of reported schools with Title I expenditures and the total number of schools
with Title I expenditures recorded in the LEAs’ accounting systems.

We relied on computer-processed data provided by California Education and the three selected
LEAs for our evaluation of data quality. We verified that LEA data submitted to California
Education were supported by source documentation and traced the LEA data to the
corresponding recipient data in California Education’s reporting system. Lastly, we used
California Education’s data as control totals to verify the accuracy and completeness of the
Final Audit Report
ED-OIG/A09K0002                                                                      Page 21 of 27

statewide LEA data and the aggregate recipient data. We determined that the
computer-processed data were sufficiently reliable for the purposes of this audit.

We performed fieldwork at California Education’s headquarters in Sacramento, California,
during the period December 2009 through May 2010. We performed fieldwork at Fresno in
February 2010, San Francisco in March 2010, and San Diego in April 2010.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Final Audit Report
ED-OIG/A09K0002                                                                                                                           Page 22 of 27




Table 2: Total Recovery Act Personnel and Nonpersonnel Costs for Reviewed Grants and LEAs and the Expenditure Amounts and
         Number of Transactions Selected for Testing (a)
                                            Personnel Costs                         Nonpersonnel Costs
            LEA
                                 SFSF (b)        Title I       IDEA        SFSF (b)      Title I       IDEA          Total
             Fresno
                      Total Costs      $8,744,502       $1,922,233       $8,401,204       $3,457,048          $0               $0           $22,524,987
   Expenditure Amounts Selected        $3,053,900         $115,820          $20,750         $502,578          $0               $0            $3,693,048
  Number of Transactions Selected         10               20               10                12               0                0               52
           San Diego
                      Total Costs     $29,752,791      $10,177,365      $12,297,026           $0           $2,247,311       $1,493,346      $55,967,839
   Expenditure Amounts Selected           $27,011          $73,351          $11,791           $0             $116,740         $703,104        $931,997
  Number of Transactions Selected          4                6                8                 0               4                4               26
         San Francisco
                      Total Costs      $8,068,223       $1,914,846          $0            $5,334,901        $831,654        $6,152,557      $22,302,181
   Expenditure Amounts Selected           $48,633          $40,076          $0            $2,026,423        $424,975          $243,949       $2,784,056
  Number of Transactions Selected         10               10                0                3               3                 6               32
              Total
                      Total Costs     $46,565,516      $14,014,444      $20,698,230       $8,791,949       $3,078,965       $7,645,904     $100,795,008
   Expenditure Amounts Selected        $3,129,544        $229,247           $32,541       $2,529,001        $541,715         $947,053        $7,409,101
  Number of Transactions Selected         24                                                  15               7                10             110
(a) The number of transactions tested at each LEA varied depending on the amount of personnel and nonpersonnel costs charged to each grant. In some cases,
    the LEA did not spend grant funds during the period covered by our review.
(b) SFSF Education Stabilization grant.

                                             36               18
Final Audit Report
ED-OIG/A09K0002                                          Page 23 of 27




                              Enclosure

            Planning and Research and California Education
              Comments on the Preliminary Audit Report
            Final Audit Report
            ED-OIG/A09K0002                                                                         Page 24 of 27

                                                    ST A T E O F C A L I F O R N I A


                             GOVERNOR’S OFFICE of PLANNING AND RESEARCH
  EDMOND G. BROWN JR.
        GOVERNOR


March 11, 2011

Ray Hendren, Regional Inspector for Audit
Office of Inspector General
U.S. Depart ment of Education
501 I Street, Suite 9-200
Sacramento, Californi a 94814-2559

Dear Mr. Hendren:

Subj ect:        Preliminar y Report - California: Use of Funds and Data Qualit y for Selected American
                 Recover y and Reinves tment Act Programs ED-OIG/ A09K0002

Thank you for your comments and recommendations for the audit criteria for: 1) selected LEAs in
California use of Recover y Act funds in accordance with applicable laws, regulations, and guidance
and 2) accurate, reliable, complete, reported data in accordance with Recover y Act report ing
requirements. We appreciate the chance to address and respond to the preli minar y report.

Since the audit proces s began, California has been wor king constr uctivel y with the feder al
government, state agencies, the State Recovery Tas k Force, as wel l as its ARRA recipients resulting in
improved reporting. In addition, the Governor’s Office of Planning and Research is coll aborating
with the California Depart ment of Education to monitor and addres s issues raised in the audit report
specific to the State Fi scal Stabilization Fund program. We will, of course, continue our efforts to
ensure quality and accurate data.

We look forward to further wor king with you on additional i mprovements to the program.

Sincerely,

/s/

Ken Alex
Director, Gover nor’s Office of Planning and Research

KA:kk

cc:     Jennifer Grutzius, Chi ef of Staff
        California Recover y T ask Force

        Carol Bingham, Senior Fiscal Policy Advisor
        California Depart ment of Education

        Kevin Chan, Director of Audits and Investigation Division
        California Department of Education

                                 1400 10th Street P.O. Box 3044 Sacramento, California 95812-3044
                                       (916) 445-0613 FAX (916) 323-3018 www.opr.ca.gov
Final Audit Report
ED-OIG/A09K0002                                                           Page 25 of 27




                                    March 9, 2011

Ray Hendren, Regional Inspector for Audit
Office of Inspector General
U. S. Department of Education
501 I Street, Suite 9-200
Sacramento, CA 95814-2559

Dear Mr. Hendren:

Subject: Draft Report—California: Use of Funds and Data Quality for Selected
         American Recovery and Reinvestment Act Programs ED-OIG/A09K0002

In response to the U.S. Department of Education (ED), Office of Inspector General’s
(OIG) draft report entitled California: Use of Funds and Data Quality for Selected
American Recovery and Reinvestment Act Programs, the California Department of
Education (CDE) respectfully requests that CDE’s written comments on the reported
findings and recommendations are noted and considered in regard to the final report
and subsequent program determinations.

Finding No. 1 – California Education Needs to Ensure That Local Educational Agencies
(LEAs) Use Recovery Act Funds According to Federal Requirements.

      Recommendation 1.1:
      “Ensure the deficiencies we identified for the Title I grant funded under the
      Recovery Act are corrected by (1) confirming that Fresno reimbursed its subgrant
      for the $20,457 ($15,097 + $5,360) in personnel costs that were improperly
      charged for four employees and (2) requiring San Diego to reimburse its
      subgrant for the $2,950 in nonpersonnel costs that were improperly charged for
      two field trips.”

             CDE Comments and Corrective Action:
             To ensure the identified reimbursements of personnel and non-personnel
             costs to the American Recovery and Reinvestment Act (ARRA) subgrant
             have been made, CDE will request that the two districts submit
             documentation of the reimbursements to the appropriate subgrants by
             May 1, 2011.
Final Audit Report
ED-OIG/A09K0002                                                             Page 26 of 27



      Recommendation 1.2:
      “Require Fresno to strengthen its estimation and reconciliation procedures to
      ensure that only personnel costs allocable to Title I are charged to the Title I
      grant funded under the Recovery Act. Procedures could include (1) selecting only
      eligible employees whose costs are allocable to the grant when estimating
      personnel costs, and (2) performing reconciliations of actual personnel activity
      each quarter to correspond with Section 1512 reporting dates, rather than only at
      year-end.”

             CDE Comments and Corrective Action:
             CDE will request that the Fresno Unified School District (USD) submit
             documentation by May 1, 2011, of the following items: (1) procedures to
             ensure that only personnel costs allocable to Title I are charged to the
             Title I grant funded under the ARRA; and (2) documentation of Fresno
             USD performing reconciliations of actual personnel activities each quarter
             to correspond with Section 1512 reporting dates.

      Recommendation 1.3:
      “Ensure that San Diego personnel responsible for charging or approving
      expenditures to Federal grants understand and follow Federal cost principles so
      that entertainment costs are not charged to Recovery Act grants in the future.”

             CDE Comments and Corrective Action:
             The CDE has scheduled a Categorical Program Monitoring (CPM) visit
             during May 2 to 5, 2011, to evaluate San Diego USD’s compliance with
             applicable federal requirements and to provide technical assistance to
             ensure that San Diego USD is appropriately expending and utilizing ARRA
             funding.

      Recommendation 1.4:
      Notify LEAs statewide of the types of deficiencies identified in Finding No. 1 and
      instruct LEAs to identify and correct such deficiencies, if found, to ensure that
      similar unallowable costs are not charged to the Title I grant under the Recovery
      Act.

             CDE Comments and Corrective Action:
             The CDE has increased its efforts to ensure that the LEAs utilize ARRA
             funds according to the federal requirements by: (1) providing links to
             guidance posted on the CDE’s Web page; (2) conducting webinars; (3)
             sending out guidance through e-mails; and (4) providing technical
             assistance via CPM field visits and telephone. By April 15, 2011, CDE will
Final Audit Report
ED-OIG/A09K0002                                                                 Page 27 of 27

                provide additional guidance specific to the types of deficiencies identified
                by the ED OIG.

Finding No. 2 – California Education Needs to Ensure Reported Jobs Data Are
Complete, Accurate, and Consistent with Reporting Guidance.

      CDE Comments and Corrective Action:
      The CDE has taken the following steps to ensure reported jobs data are
      complete, accurate, and consistent with reporting guidance:

             1. Provided guidance to LEAs with emphasis on correct job reporting
                methodologies and to correct any deficiencies identified during previous
                quarter’s reporting to the LEAs via correspondence from the State
                Superintendent of Public Instruction; the guidance is posted on the CDE
                ARRA Reporting & Data Collection System Web page at
                http://www.cde.ca.gov/ar/rr/rptingdatcol.asp.

             2. Reviewed jobs data for reasonableness prior to Federal submission and
                contacted LEAs to resolve questionable data.

             3. Notified LEAs of the continuous correction period and encouraged LEAs to
                make corrections during that time.

             4. Placed greater data checks on CDE’s 10 largest districts.

             5. Included selected ARRA programs as part of the CPM review to ensure
                ARRA jobs data reported is complete and in accordance with Federal
                guidance.

If you have any questions regarding the CDE’s response to the draft report, please
contact Kevin W. Chan, Director, Audits and Investigations Division, at 916-323-1547,
or by e-mail at kchan@cde.ca.gov.

Sincerely,

/s/

Richard Zeiger
Chief Deputy Superintendent of Public Instruction

RZ:amb
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